Inflation is not soaring, and economic growth is solid.
The Tariff Tantrum has proven that consensus was wrong about soaring inflation and an economic slump. Why? The exaggerated perception of tariffs’ economic impact stemmed from the belief that American consumers would bear the full burden of tariffs. Why were they wrong?
The first reason was that most analyses relied on a simplistic calculation of tariffs, treating supply chains as if they only involved buyers and sellers. Supply chains are very complex, and most exporters must deal with overcapacity challenges and working capital problems. Thus, the impact of tariffs is likely to be absorbed by numerous links in the supply chain, including transport, storage, distribution, manufacturing, retailers and purchasing chains.
Furthermore, most exporting companies face a significant problem of overcapacity and working capital; if they don’t sell their products fast and effectively, their debt soars, and the losses at warehouses can lead to a chain of bankruptcies.
Continue reading Why Keynesians got inflation and growth wrong.